The elation in Nigeria at the news, released last April, that the country had overtaken South Africa as the continent’s largest economy, was largely confined to government circles.

Many Nigerians have refused to get caught up in the excitement. Abiodun Ayinde, who owns a small waste management company in Lagos, Nigeria’s largest city and economic capital, is one.

Ayinde does not care about the rivalry between Nigeria and South Africa. Topmost in his mind is the quest that has given him sleepless nights in the last five years: Ayinde’s clientele is growing and his expanding business urgently requires more staff and one more mobile waste compactor.

“Business is not doing badly at all,” he says. “But the problem I have is that I am unable to raise funds to further expand the business. I need to buy a compactor and I also want to employ more hands.”

On paper, there are several funding options available to a Nigerian business person who wants to set up a new business or expand an existing one. The country has 21 commercial and two specialised government banks set up to fund large-scale industry projects, as well as 871 microfinance firms authorised to lend to small-scale businesses and entrepreneurs.

But in practice it is not easy for small companies to secure loans. Ayinde’s efforts to raise a 2m naira (US$12,500) bank loan to buy a used waste compactor and hire new staff have been unsuccessful. His is a typical story.

High lending rates

Most Nigerian entrepreneurs and small-scale businesspeople do not start companies by borrowing from a bank. Official numbers on bank borrowing are lacking, but from years of talking to small business owners, this writer has learned that most Nigerian entrepreneurs turn to banks only when they need funds to expand an already successful business.

This is because banks and microfinance institutions charge prohibitively high interest rates and attach onerous requirements to loans.

Funding challenges are spanners in the works of many small businesses in Nigeria, according to Femi Egbesola, the president of the Association of Small Business Owners of Nigeria, a trade group. “Most of the financial institutions are requesting for conditions that are difficult for small companies to meet, [especially] collateral,” he told Leadership, a Nigerian daily, last April. “The banks charge about 27% interest rate per year and everybody is complaining that it is on the high side.”

Some Nigerians question why interest rates have remained high despite a recent fall in the country’s inflation. A bank “must be a commercially viable enterprise, but why must they charge 20%?” asked Ngozi Okonjo-Iweala, Nigeria’s finance minister. Inflation in the first eight months of 2013 diminished from 12% in January to 8.7% in August, she added, “meaning interest rates can also go down”. As of March 2014, Nigeria’s inflation rate was 7.8%, according to the national statistics bureau.

Commercial banks borrow from the Central Bank of Nigeria (CBN), which offers money to banks at a rate called the monetary policy rate (MPR). The CBN considers the country’s prevalent inflation rate while setting the MPR. The idea is to help banks lend to businesses at non-prohibitive rates. Figures from www.cbrates.com, a website that compiles world interest rates, show that Nigeria’s interest rate is one of the highest of Africa’s large economies. Nigeria’s current MPR of 12% is higher than the prevailing rates of 3% in Morocco, 4.5% in Tunisia, 5.5% in South Africa, 8.25% in Egypt and 9.25% in Angola.

Trade groups, such as the Lagos-based Manufacturers Association of Nigeria (MAN), have campaigned for lower rates for decades. The organisation’s 2013 report claimed that some Nigerian banks are charging borrowers as much as 35% on loans, a rate so high that businesses cannot survive. “In the last 10 years, interest rates charged MAN members by banks have been at an average of 19.9% for most of the manufacturing sub-sectors,” according to the report.

These high rates are just one facet of Nigeria’s crippling commercial environment. The World Bank’s 2014 Ease of Doing Business index places Nigeria at a lowly 147 of 183 countries.

Infrastructure challenge

Many of the problems stem from Nigeria’s broken infrastructure. Entrepreneurs have to generate electricity from private generators, dig industrial boreholes to ensure a reliable water supply, and must also pay private security companies to secure premises and assets.